Innovation Requires Effort in Both Public and Private Sectors

Stephen DeAngelis

October 12, 2012

In a couple of previous posts on innovation, I’ve quoted Sam Shuttleworth, who wrote, “Innovation: everyone is talking about it, everybody wants it. It seems these days since you can’t open a newspaper or conference without falling over the word. Innovation is held up by our politicians as the key to a successful economic future, it’s on the lips on most CEOs.” [“When it comes to innovation, deconstruction is the ‘new black’,” Procurement Leaders Blog, 2 April 2012] McKinsey & Company analysts Brian Gregg, Erik A. Roth and Gordon Orr add, “Innovation is an enduring and universal objective that inspires some and eludes many.” [“Innovation-led growth: Eight essentials,” 30 November 2011 (registration required)] Geoffrey Owen, a former editor of the Financial Times and a senior fellow in the London School of Economics’ Department of Management, writes, “Governments want business to spend more on research and development. But even if, through tax breaks and other inducements, the amount of investment in R&D is stepped up, it will not necessarily lead to more innovation.” [“A hybrid innovation model that stays the course,” Financial Times, 19 September 2012]

 

What are we to discern from such comments? The answer seems to be that innovation is important but actually innovating is difficult. Owen writes, “What matters is how well companies manage the innovation process, how they organise and motivate their scientists, how they decide which ideas to pursue and which to discard.” Gregg, Roth, and Orr add, “Systematic innovation involves much more than hiring armies of creative people. Innovation that continuously drives success requires creativity under discipline. Shaping this framework are diverse sources of insight and rigorous science backed by the appropriate process and structure.” They claim to have “identified eight essentials that prove relevant to any organization pursuing innovation at scale.” Before discussing those eight essentials, I believe that Owen’s article establishes a good backdrop. His article is a review of a book written by Harvard professor Josh Lerner entitled The Architecture of Innovation: The Economics of Creative Organizations. Owen claims that “Lerner provides an authoritative analysis of the strengths and weaknesses of the American system.” He continues:

“The days of big central laboratories are over – Bell Laboratories is the classic example – as companies break up their scientific staff into smaller units and make more use of external providers. There has also been more attention to incentives, a tricky issue in research since so much of it is done in teams. Scientists do respond to monetary rewards, but they need to be linked to the long-term success of the group to which they belong. Individual incentives based, say, on the number of patents filed, may lead researchers to neglect collaboration. A useful device is the internal prize scheme, which rewards teams rather than individuals and gives the winners public recognition as well as money.”

Although Owen appears to be dismissive of Bell Labs, I don’t believe that is his intention. In its day, Bell Labs was a true pioneer. For more on that subject, read my post entitled Innovation: The Legacy of Bell Labs. Owen states that large corporate labs are now being overshadowed “by start-up companies, often backed by venture capital.” He indicates, however, that “this model has shortcomings, not least the lack of flexibility over timing.” By that he means that venture capital-backed companies focus much more on short-term pay offs than on long-term research. He continues:

“Lerner favors a hybrid model, between the corporate research laboratory and the venture-backed start-up. This is the corporate venture capital arm of the large corporation, charged with investing in young companies pursuing technologies relevant to the parent’s business. Although these entities have had a mixed record, the best of them are run in a way that exploits the staying power of the big company – it does not have to seek a quick exit – but is less prone to bureaucratic inertia. It is easier for the company’s VC arm to pull the plug on an outside organization (which is normally co-owned with other investors) than to abandon an internal project.”

Moving from the private to the public sector, Owen writes, “On innovation policy generally, there is much to be learnt from the US.” But, he insists, even in the policy arena the U.S. doesn’t always get it right. He explains:

“As for the role of governments, their main task is to create an environment in which entrepreneurial companies can flourish. A necessary ingredient is an effective intellectual property regime, and here the US seems to have gone seriously awry; patent protection has been broadened far too widely, leading to a flood of unproductive litigation.”

Historically, governments (particularly the U.S. Government) have been one of the main sources of funding for basic, long-term scientific research. Owen agrees that “direct funding of innovation by government should be seen as a long-term investment, not a quick fix.” Such research can spawn real breakthroughs that have broad economic impact. Owen continues:

“Lerner criticizes the US Defense Advanced Research Projects Agency, famous for the early research that led to the internet, for steering away from projects that will take more than five years to come to fruition. Darpa’s managers may think that by focusing on short-term results they will get more ‘bang for the buck’, but, as Lerner points out, the effect may be the opposite.”

To learn more about DARPA, read my post entitled Happy Birthday DARPA. With Owen’s article as a backdrop, I return to the eight essentials identified by Gregg, Roth, and Orr. Their first essential deals with aspiration. They write:

Aspire: Innovation is fundamental to the growth vision. To be a top-performing innovative company or business unit, it is essential to describe a compelling performance vision that places innovation at the heart of future growth. It should answer one question: How much innovation do we need to meet our financial objectives?”

As part of the aspiration process, they recommend that companies should implement the following steps: Set a clear objective for innovation-led growth; value their current innovation pipeline; align senior leadership to innovation criticality; and communicate an inspirational vision. Their second essential involves making good choices. They write:

Choose: Invest in the most valuable innovation spaces. The second essential is for leaders to have a sense of where the best current and future market opportunities can be found and of the right time to tackle them.”

To help executives make better choices, the authors recommend: Developing market intelligence; creating scenarios for key trends and possible disruptions; and then selecting innovation spaces that emerge from those activities. Their third essential involves discovery. Gregg, Roth, and Orr write:

Discover: Actionable and differentiated insights fuel innovation. Great innovators interpret their existing context and imagine future ones. They use a combination of observation, intuition, and inspiration to work within the chosen innovation space and frame the important problems to solve. It takes experience and skill to systematically bring together areas of knowledge and uncover truly differentiated, actionable insights in order to understand the specific problems that are most worth solving.”

They claim that the discovery process involves: Uncovering the “why” behind customer purchase and usage behaviors; synthesizing information into insights and describing specific problems to solve; and proposing new solutions. That language should sound familiar to anyone who deals with big data. Uncovering behavior patterns and synthesizing information is at the heart of big data analytics. Their fourth essential involves the ability to evolve. They write:

Evolve: Innovation also applies to business models. Eighty percent of global chief strategy officers recently surveyed believe their business models are at risk. Among their biggest concerns are new entrants wielding disruptive technologies and process innovations. In dynamic markets, product innovation alone is insufficient. A strong innovation portfolio goes beyond products; it includes other forms of innovation, encompassing new business models and distinctive business processes that can build competitive advantage. Of all innovations, business model innovation is known generate the most significant long-term value.”

To help businesses evolve, Gregg, Roth, and Orr recommend that executives “consider business models that their companies can use to deliver value to priority groups of new customers” and “selectively invest in a diversified set of initiatives to explore innovative business models.” Their fifth essential involves striking balance. They write:

Balance: Adjust your innovation portfolio for value, time, and risk. … Almost 60 percent of respondents to McKinsey’s 2010 Global Innovation Survey admitted that their companies are not good at selecting the right ideas and managing a portfolio. Yet establishing an innovation portfolio, managing it well, and combining this with commercial excellence can enable companies to realize impressive performance gains. … Far too often, innovation pipelines become overloaded with incremental projects (not breakthrough innovations) because decision makers allocate resources to their own passions, unchecked by any kind of group discussion or control. Balancing for innovation entails three leadership actions.”

According to the authors, those leadership actions are: Generating transparency in the innovation pipeline; aligning the portfolio; and establishing an assessment and debate routine.” The sixth essential involves being able to look beyond company walls. Gregg, Roth, and Orr write:

Extend: Value lies beyond company walls. For decades, organizations relied on strong internal R&D or technology functions to deliver innovation programs. Many were successful. But the increased pace of technological advancement, a globalizing economy, and lower capital barriers have resulted in an environment where a university student can come up with the next multibillion-dollar innovation. Companies that extend their reach beyond their organization’s walls to find innovation partners can get greater returns on their investments. Technology now allows access to the knowledge, skills, and abilities of broad – even global – networks of external partners.”

They claim that “taking full advantage of the creation potential outside your company can be accomplished in three steps.” Those steps are: Anchoring the right mindset for extending innovation networks; actively managing connections; and, using strategic networks to source new ideas. The seventh essential involves mobilizing an organization. They explain:

Mobilize: Organize and inspire a culture of innovation. Successful and sustainable innovation requires high levels of energy and commitment. Executives play a critical role in promoting the right culture and environment to stimulate and support the sometimes long and tedious work required to make innovation successful. In fact, committed leadership is the greatest predictor of innovation success. When innovation at scale has proven extremely successful, 60 percent of senior executives said they were either fully accountable or actively involved from the early stages, according to McKinsey’s 2010 Global Innovation Survey. When innovation projects fell short of objectives, only 35 percent of leadership was fully accountable or actively involved early on.”

Change is hard and it is always met with some resistance. I agree with the authors that good change leadership is essential for ensuring that a culture of innovation is fostered in an organization. Gregg, Roth, and Orr assert that “a few activities can help mobilize a company toward innovation.” They include: Defining clear roles and responsibilities to drive the innovation; building cross-functional teams to drive innovation; and downplaying organizational structure. Long-time readers of this blog know that I’m a particular fan of building cross-functional teams. The final essential identified by Gregg, Roth, and Orr involves repetition. They write:

Repeat: Processes and metrics can sustain the ‘rhythm’ of innovation. The ability to change and innovate not periodically but perpetually is a company’s ‘renewal capability.’ According to McKinsey’s Organizational Health Index, companies with a top-quartile ‘renewal’ score are twice as likely to outperform their peers on margins, book value, and income growth.”

Although they don’t want to overstress structure, Gregg, Roth, and Orr state that “innovation requires a substantial infrastructure, one that supports and fuels a constant flow of new ideas and approaches.” Those approaches include: Allowing the innovation objective (aspire) to propel the annual planning process; establishing a step-by-step process to capture and combine new insights (discover and extend); anchoring innovation portfolio reviews (choose, evolve, and balance) in the regular business review cadence; and ensuring that the appropriate people are in the right positions backed by adequate processes (mobilize).”

 

As noted above, innovation is difficult but essential if an organization is going to survive and thrive in today’s fast-paced business environment. Innovation is difficult because organizations are basically established to promote stability rather than to foster change. Finding the right balance between stability and change requires constant vigilance and the ability to pivot when new insights indicate that change is necessary.